March 8 (Bloomberg) -- The European Union plans to oblige
governments and businesses to make energy efficiency a higher
priority, a strategy to help the bloc exceed its goal of cutting
carbon by 20 percent and boost the security of supplies.

The EU may cut greenhouse gases 25 percent by 2020 compared
with 1990, as long as it steps up energy-saving measures, the
European Commission, the bloc’s executive arm, said in a policy
paper published today in Strasbourg, France. The document maps a
path for an 80 percent reduction in greenhouse gases by 2050.

To avoid a drop in the price of carbon allowances as new
efficiencies lower emissions, the commission offered the option
of withholding an unspecified number of permits starting in
2013. The EU, which aims to lead the global fight against
climate change, said the most cost-efficient scenario is to cut
emissions by 40 percent in 2030 and 60 percent in 2040.

“What we presented today shows very clearly it’s sound
economics, good business and responsible politics to start now
the transition to a low-carbon society,” EU Climate
Commissioner Connie Hedegaard told a news conference today. “To
delay and to postpone action it would become more expensive.”

EU carbon permits for December rose 0.3 percent to 15.91
euros ($22.13) a metric ton as of 5:30 p.m. in London on the ICE
Futures Europe exchange in London. Before the EU published its
plan, prices were as low as 15.71 euros.

Market prices may move higher on the EU plan, especially the
set aside of potentially hundreds of millions of allowances to
increase scarcity, said Carine Hemery, an analyst in Paris at
Orbeo, the emissions trading venture of Societe Generale SA and
Rhodia SA. “They don’t want to see the carbon price going
down,” she said today by phone.

Lagging Behind

While the 27 EU nations are poised to meet the binding goal
to cut emissions by 20 percent, they are lagging behind on their
pledge to boost energy efficiency by 20 percent, the commission
said in the document. Recent EU estimates show Europe will
achieve only half of the improvement it aims for.

Measures that could help accelerate energy savings include
requiring public authorities to refurbish at least 3 percent of
their buildings each year, roughly double the actual renovation
rate, the commission said in a separate statement. Higher
standards should also be applied in public purchases of goods,
services and works, it said. Another idea is to focus on the
roll-out of smart grids and smart meters to limit energy
consumption, according to the document.

‘Binding Measures’

The commission plans to present “legislative proposals
with very concrete binding measures” in a few months, it said.

To reach the energy-savings goal, it may be necessary to
set aside some of the emission allowances in the next phase of
the bloc’s emissions-trading system that starts in 2013, the
commission said. The program, known as the ETS, is the EU’s
cornerstone of its plan to reduce greenhouse gases blamed for
climate change. It imposes pollution limits on more than 11,000
utilities and manufacturing companies.

“Without a set-aside, energy savings achieved by one
company would result, via relatively lower demand for
allowances, in weakening of the price of allowances,” the
commission said. “This could prompt another company to produce
more, consume more energy and emit more carbon dioxide. As a
result, net energy savings would be low or non-existent.”

The commission revised the proposal from the original draft
obtained by Bloomberg News last month, when it suggested that
between 500 million and 800 million allowances could be
withheld in the eight-year trading phase through 2020.
That would correspond to as much as 5 percent of supply.

‘Hamper Competitiveness’

The commission’s plans to withhold some permits sparked
criticism from energy-intensive industries, including the
association of the European steel producers Eurofer. The group
said last month the set-aside would effectively mean tighter
emission caps and higher costs for companies in the EU emissions
program.

“Setting aside allowances in the EU ETS could create
uncertainty for business and hamper competitiveness of European
industry,” Brussels-based BusinessEurope, an employers’
federation representing more than 20 million companies, said in
an e-mailed statement. “To improve predictability, it is
essential not to disrupt the EU climate and energy policy
framework already in place for 2020.”

The potential set-aside, which would have to be approved by
member states, would be built gradually from the pool of
allowances to be auctioned by member states, according to the
commission. The bloc, which has given away the majority of
allowances since it started the program in 2005, will require
most emitters to purchase their pollution rights from 2013.

“The set-aside is one of the better options to fix the
emissions-trading system,” said Sanjeev Kumar, an associate at
climate-protection group E3G in Brussels. “Now we have to win
the politics.”

Political Divide

In its policy paper today, the commission stopped short of
proposing a more-ambitious binding emissions-reduction target
for Europe in 2020, as member states and businesses remain
divided on whether the bar should be raised. Western European
countries including France, Germany and the U.K. have called for
a tougher goal of 30 percent, and eastern nations tend to favor
a more-cautious approach.

“The roadmap shows that Europe’s current 20 percent target
for 2020 isn’t enough or cost effective and shows that Europe’s
already got the policies and the tools to cut emissions by 25
percent at home,” U.K. Energy and Climate Change Secretary
Chris Huhne said in a statement. “This makes the case for going
to 30 percent stronger and more urgent.”

‘First Step’

Building a low-carbon economy will require an additional
annual investment of around 270 billion euros over the next 40
years, an equivalent to 1.5 percent of the EU’s gross domestic
product, the commission said. Much of this will be recovered
through lower import bills for oil and gas, it projected.

The spending will help reduce Europe’s reliance on imports
of energy, stimulate new sources of growth and help create jobs,
according to the commission.

“The roadmap is a first step towards defining the elements
of that longer term clarity and predictability which will enable
our companies to begin to plan and execute the significant
investments which will be needed to deliver a low carbon
economy,” Brussels-based European electricity industry
association Eurelectric said in a statement.